Japan upgrades GDP growth forecast, CPI seen far below BOJ target

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People are reflected in mirrors at an entrance of a shopping complex in Tokyo, Japan May 17, 2017. Picture taken May 17, 2017. REUTERS/Toru Hanai

TOKYO (Reuters) - Japan’s government revised up its growth projections for the current and next fiscal years, forecasting the economy to expand 1.9 percent and 1.8 percent respectively on the back of steady improvement in domestic demand, the Cabinet Office said on Tuesday.

Consumer inflation is estimated at 0.7 percent for this fiscal year and 1.1 percent next, underscoring the challenge for the central bank to accelerate inflation to its 2 percent target as prices continued to lag an economy growing at a steady pace.

The gross domestic product projections compared with earlier estimates by the Cabinet Office of 1.5 percent and 1.4 percent growth respectively in the current and next fiscal years.

Japan’s economy has expanded at a steady pace this year, lifted by surging exports growth that has kept the manufacturing sector humming. A key conundrum for policymakers remains persistently low inflation that is complicating the Bank of Japan’s efforts to exit its massive stimulus.

The government’s growth estimates were higher than those seen by the central bank and most private-sector economists, while the inflation projections are more subdued than the central bank’s rosy forecasts.

The Cabinet Office also forecast nominal economic growth of 2.0 percent for the current fiscal year and 2.5 percent for the next fiscal year from April 1, they said. Higher nominal growth estimates point to government expectations for greater tax revenue.

The growth projections will be used to estimate tax revenue and compile next year’s budget draft, expected to be endorsed by the cabinet on Dec. 22.

The government usually issues economic projections for the coming fiscal year in December when compiling the annual budget, and revises them around mid-year.